Oil prices tumbled on Tuesday, with a drop exceeding 4%, as both U.S. crude and Brent crude reached their lowest points in over three months, erasing all gains since the recent Israel-Palestine conflict. Investors' concerns about the global economic outlook, coupled with Federal Reserve officials' suggestions that interest rate hikes may not be over, and the U.S. Energy Information Administration's (EIA) downward revision of future oil price forecasts are among the reasons for the sharp decline.
Throughout the day, oil prices remained sluggish, with the downturn intensifying during the afternoon in Eastern Time, falling below the 200-day moving average. By the close, WTI December crude oil futures had fallen by $3.45, a 4.27% decrease, to $77.37 per barrel, nearing the July 21 closing price of $76.07. Brent January crude oil futures ended the day down $3.57, a 4.19% loss, at $81.61 per barrel, approaching the July 26 closing price of $81.29.
Currently, the spot price spread for WTI crude oil, which is the difference between the two nearest contracts, has narrowed to its lowest level since July, indicating that supply remains ample.
Data from the U.S. CFTC last Friday showed that investors' bullish sentiment on crude oil had fallen to a several-month low. In the week ending October 31, speculators reduced their net long positions in NYMEX WTI crude oil by 60,795 contracts to 153,474 contracts, marking a 16-week low. Net long positions in Brent and WTI crude oil decreased by 75,165 contracts to 315,626 contracts, a 17-week low.
On the same day, hawkish remarks from two senior Federal Reserve officials strengthened the U.S. dollar, which is unfavorable for oil prices:
Neel Kashkari, President of the Minneapolis Federal Reserve, stated that it's too early to declare victory over inflation and expressed concerns that inflation might resurface. He suggested that an overly tight monetary policy is preferable to one that is not tight enough. Federal Reserve Governor Michelle Bowman indicated that she still believes the Fed will need to raise interest rates to curb inflation, although she also noted that since September, a surge in U.S. Treasury yields has led to tighter financial conditions. The EIA has lowered its future oil price forecasts. It now expects Brent crude oil prices to average $83.99 per barrel in 2023 (previously projected at $84.09) and $93.24 per barrel in 2024 (previously projected at $94.91).
The EIA also adjusted its projection for U.S. oil production, expecting an average of 12.9 million barrels per day in 2023 (previously 12.92 million) and 13.15 million barrels per day in 2024 (previously 13.12 million).
Recently, global economic data has shown signs of weakness. For instance, the U.S. nonfarm employment cooled, and the unemployment rate rose to a near two-year high; the U.S. October ISM Manufacturing PMI plummeted, and the Non-Manufacturing PMI fell to a five-month low; the Eurozone's GDP contracted in the third quarter, with a preliminary quarter-over-quarter decline of 0.1%; and the Eurozone's October PMI dropped to a near three-year low.
China's export data released on Tuesday also sparked market concerns about the future global economic outlook and energy demand, showing a year-over-year decline of 6.4%.
Many industry insiders have recently noted a noticeable slowdown in the world's major economies as the fourth quarter begins, casting a shadow over future prospects and raising concerns about the impact on crude oil demand.
Saudi Arabia and Russia both announced on the past Sunday that they would extend their production cuts until the end of the year. Saudi Arabia will reassess its production next month. OPEC+ is scheduled to hold a ministerial meeting on November 26 to review oil production policies for 2024.
As the Israel-Gaza conflict continues, the market is highly focused on the future decisions of OPEC+. Analysts at Eurasia Group stated:
OPEC+ leaders are expected to maintain their current "risk-averse route" when they meet in November. Compared to the prospect of overheated oil prices, Saudi Arabia is still more concerned about the risk of prices falling below the $85 per barrel threshold. As the energy transition impacts Western oil consumption, key OPEC+ member countries will continue to manage the market cautiously yet proactively as they enter 2024. Saudi Arabia's confirmation on Sunday that the current production limits will extend into the next month reflects the country's concerns about downward risks in 2024, despite the market's focus on the direct threat to supply from the Israel-Gaza crisis.
